Organizations, tight couplings and crisis

In addition to being a not-so-thinly veiled comment on our current ruling class, the Perrow quote in the previous post introduces his concept of the organization as a tool. In Perrow’s view (which I share), organizations are a mechanism for the accomplishment of goals that can diverge sharply from what would be reasonable for an external observer to assume. These goals can include – but are by no means limited to – the kind of transaction costs focused on by more traditional scholars like Coase and Williamson.

What I find useful about Perrow’s concept is its emphasis on the power relationships both within an organization and between the organization and its external environment. It also provides a theoretical rationale for treating the selection and use of a specific organizational form as a potential source of information about underlying goals, since different forms offer different benefits (especially in the era of the Roberts Supreme Court, as evidenced by the Janus ruling).

This framing grows more relevant by the day given the central role of organizations in many of the economic and political crises we currently face. Some examples:

MERS. The organization was originally described as a solution to onerous transaction costs. In practice, however, what MERS did was to create an extra-legal framework for the appropriation of the right to foreclose attached to the security agreement/mortgage, as well as the transfer of that right from member to member using the structural innovation of the Certifying Officer. And all of this was made possible not by the technology of their database (which screen shots indicate is hardly earth-shattering) but rather the terms of their membership agreement as a private corporation, which claims the right for the firm to foster this behavior while remaining free of any liability.*

Rating Agencies.  As Mike Konczal of Rortybomb notes, the agencies are performing an enforcement role in the current debt ceiling debate similar to that of the IMF in dealing with weakened borrowers, and one which they have played in the past in other contexts within the U.S.  Like the power of MERS (whose subsequent shareholders drew on the combined market power of its initial investors), the coercive power of the ratings agencies derives not from the quality of their output but from the aggregated influence of the regulatory, financial and other institutions whose behavior is keyed off of their ratings. And like MERS, the ratings agencies claim when challenged that they are free of liability, in their case because of claimed first amendment protection (for a fuller treatment, see longer follow-up post on S&P here).

Land Grab. Both the World Bank and the UN FAO reports on the land grab – the appropriation of arable land in poorer countries – emphasize two surprising points, which in my view are likely to be related. First, the bulk of the transactions involved local buyers, almost always firms, rather than foreign purchasers of land rights. Second, even in cases where the transactions were state-to-state, they were structured so that private companies would manage the actual implementation. While the reports did not cite many specifics, I would not be surprised if the “local” firms involved in these transactions were acting as agents for other principals. The highly publicized story of Jarch Capital is a case in point – the New York investment firm gained entry to South Sudan via the purchase of a shell company owned by the son of a warlord, thus becoming “local.”

Deficit Commission. Obama created the Deficit Commission by executive order after the concept was rejected by the Senate, indicating the importance of the subject to him as well as the political benefits of an external organization.

The secretive deliberations of the Commission were discussed extensively during its operations, as was the anti-New Deal bias of its leadership. What tends to be glossed over is the fact that both Reid and Pelosi agreed to move the Commission’s formal recommendations to their respective floors for an up or down vote. The only reason this didn’t happen was the Commission’s inability to reach a supermajority of 14 votes, which took over the narrative in the weeks following the release of the various reports.

Nonetheless, both the Commission’s creation and the machinations around it were conducted in such a way as to maximize its impact while minimizing transparency and deliberation. This is precisely the pattern of the Reid-McConnell deficit plan, which proposes to create an operationally identical “super congress” of 12 appointees. This internally appointed body would have even more power than the Simpson-Bowles Commission in that its recommendations would be mandated to be unimpeded by amendments or filibustering (for more on this, see Yves Smith of Naked Capitalism here).


These are four very different cases, with the single common feature of the active presence of organizations. Returning to Perrow, this time for his more widely known work on system failures (or “Normal Accidents“), one way to think of these organizations is as operating at points of high leverage in tightly coupled and highly complex systems. These leverage points tend to be deep inside a given system, which tends to make the organizations’ work difficult to see until it is too late. Once these systems reach a critical point, they collapse, at which point the organizational form which formerly acted as a sword for implementation becomes a shield from liability (among other uses).

Given this central role, it strikes me that treating these organizations as instruments is a sensible approach to modeling the internal dynamics of political and economic crisis. While it may never be possible to say definitively that any one of them “caused” the unfolding disasters they are involved in, identifying precisely whose interests these organizations serve, and how those interests benefit from the given organizational structure, is likely to be much more productive than attempting to attribute motive or competence in the abstract.

* Technically, it was the membership agreement and the MOM document, but that’s a different post.

Updated 7/25/11: Copy edit and additional sentences in introduction. 7/29/11 new sentence.

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5 Responses to Organizations, tight couplings and crisis

  1. rogerglewis says:

    Look for the power behind the throne or follow the money? Perceived reality as an avatar for the truth. These arguments are all to familiar when I tried to rationalise what appeared to be irrational actions by some of my banking intsitutional partners ( irony intended) it is very clear that the relationship advertised is certainly not the relationship in action or indeed in fact. It is also true to say that the advertisement of monetary value as represented in transfers of sums representing money in property transactions is also not as advertised its a confusing hall of smoke and mirrors. For some reason the phrase Plausible Deniability also seems to fit into all of this. Two thought provoking articles for me for sure.

    This one and the one it is linked from.

  2. Anchard says:

    An excellent comment – all very good points. And I will keep pushing this idea to see how far it goes, as there seem to be specific facets of organizational structures that allow for this hall of smoke and mirrors effect (btw, that is a great combination of metaphors, and entirely apt).

  3. Pingback: Organization as instrument: Standard & Poor’s | aluation

  4. Pingback: An excellent post from EconoSpeak | aluation

  5. Pingback: Perrow on the attribution of incompetence | aluation

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